UTxO

Unspent Transaction Output

Definition: A UTXO is a specific amount of digital currency that remains after a cryptocurrency transaction has been executed. Think of it as the "change" you get back after making a purchase, but in the digital world, it is not a lower denomination—rather, it is a unique output in the blockchain database that can be spent in future transactions

How It Works: In UTXO-based blockchains, every transaction consumes one or more existing UTXOs as inputs and creates new UTXOs as outputs. These outputs then become available to be spent in subsequent transactions

Indivisible Units: Each UTXO is a discrete and indivisible unit of cryptocurrency. If you want to spend only part of a UTXO, the entire amount is used as input, and any leftover amount is returned to you as a new UTXO (like receiving change in cash transactions)

Ownership and Security: UTXOs are associated with a specific owner’s public key. Only the owner of the corresponding private key can spend the UTXO by providing a valid digital signature

Preventing Double-Spending: The UTXO model ensures that each output can only be spent once, effectively preventing double-spending attacks. Nodes in the network maintain a set of all UTXOs to validate transactions and ensure integrity

Example Scenario: Understanding UTXOs on Cardano

Suppose you receive 50 ADA in a transaction from a friend. You now have a UTXO worth 50 ADA sitting in your Cardano wallet. This UTXO is like a sealed envelope containing exactly 50 ADA that you can spend.

A few days later, you want to buy an NFT that costs 15 ADA. Here's what happens:

The Transaction Process:

1. Input: Your wallet takes the entire 50 ADA UTXO as input (you can't just spend part of it - it's all or nothing)

2. Outputs Created:

   • The NFT seller receives a new UTXO with 15 ADA + the NFT

   • You receive a new UTXO with 35 ADA as "change" (50 - 15 = 35)

   • A small amount (around 1-2 ADA) goes to transaction fees

The Result:

• Your original 50 ADA UTXO is now "spent" and no longer exists

• You have a new 35 ADA UTXO in your wallet

• You also have a new UTXO containing the NFT you purchased

• The seller has a new 15 ADA UTXO

What Makes Cardano Special: Unlike Bitcoin, Cardano UTXOs can contain multiple assets. So your "change" UTXO might contain:

• 35 ADA

• Plus any native tokens you already owned

• Plus the new NFT you just bought